China tripled its stamp tax on stock trading to 0.3 percent from 0.1 percent, triggering a reversal in the US stock market and carry trades. With the Shanghai index hitting another record high last night, the latest move by the government is seen as a bid to clamp down on the overheated market.
The hope is that the stamp tax will reduce the amount of trading, but with a tax of 3 in a thousand, the increase may only have a limited impact on the Chinese market in the long term. In the short term however with the Chinese stock market, US stock market and carry trades extremely overbought, this could be a trigger for some further unwinding. This will all depend on how the Chinese markets behave tonight. A big reaction in Asia will trigger a bigger reaction in the US. If we see an intraday reversal much like we did on the day after China widened the trading band, increased interest rates and reserve requirements, then carry trades and yen selling could return with a vengeance once again. We continue to keep an eye on stocks as carry trades continue to move in lockstep with equities.